Analysis of Politics, Philosophy and Economics from a Marxist Perspective

Friday, 18 November 2016

Britain Is Headed For Stagflation - Part 3 of 3

The other
feature that has been developing for several years is that those
factors that reduced commodityprices have started to reverse. Not
only have productivity gains slowed globally, but China has seen
rapidly rising wages. In addition, the value of the Yuan has been
rising. So that although China remains the world's workshop, and
supplier of vast quantities of consumer goods, which remain cheaper
than equivalent commodities produced in more advanced economies, the
prices of these Chinese goods is not as cheap as they were, and those
prices are likely to continue to rise.

Finally, we
have the situation with primary product prices. After the start of
the new long wave boom, in 1999, raw material prices rose sharply as
rapid increases in demand could not be satisfied by supply. But,
rising industrial productivity meant that, despite these higher
material prices, the cost of production of commodities fell.

The end of
the rise in productivity more or less coincided with the point also
where investment in raw material production started to bring huge
amounts of new supply on to the market, around 2013-14, which led to
significant oversupply and sharp falls in the global prices of oil,
iron ore, copper, agricultural products like milk, and so on. In
other words, the prices of commodities were initially constrained,
because rapid productivity growth offset higher material prices, and
when productivity growth slowed, that was offset by falling material
prices. But, now we have a slowdown of productivity along with a
stabilisation and steady rise in global material prices. For an
economy like the UK, which relies on importing large amounts of
energy, food and materials, and now also finished commodities, and
whose currency is sinking like a stone, that is very bad news.

The UK can
do little about the volume of these things it needs to import, and
the continued falls in the Pound mean that their sterling price will
continue to rise, sharply raising the cost of living. At the same
time, the UK offsets these import costs by the export of services, but
the demand for these services is not likely to rise significantly,
simply because of a lower Pound. On the contrary, Brexit means that
large sections of that service industry will relocate to Paris,
Frankfurt or Dublin. In fact, one model for am independent Scotland,
inside the EU, would be to offer Edinburgh as such a centre, where
large large portions of the UK financial services industry is already
located.

One factor
mitigating a UK slowdown in growth is that despite the
prognostications of the perennial catastrophists, global growth
appears to be rising. The US economy grew by 2.9% in the last
quarter, and it continues to create large numbers of new jobs, in
excess of what is required to cover the growth of the labour force,
reducing its unemployment rate, and even drawing some workers back
into the labour market that had left it. Wages are rising, in the
US, as a result, and that provides a basis for increased demand for
those new ranges of consumer goods referred to earlier.

The election
of Trump may cause a political shock that disturbs that, but, in
fact, Trump is committed to a bigger fiscal stimulus than was
Clinton. That stimulus will be financed by higher levels of public
borrowing, which is one reason that the yields on government bonds
have been rising sharply since Trump's election. Another reason, in
the case of US Treasuries is that 65% of US debt is held by China,
and given Trump's threats to China, it makes sense for China to sell
its holdings of US assets before Trump can confiscate them, as he has
threatened to do with Mexican assets to pay for the construction of
the wall!

In Europe
too, especially in its power house, Germany, recent survey data
indicates a pick-up in growth, and inflation. Europe and much of the
world is moving to a higher rate of growth, at a time when global
productivity growth is slowing, when the glut of primary products is
ending, when monetary policy and the inflation of financial assets
has reached the end of the road, but Brexit means that Britain will
be cut off from the main beneficial aspects of that growth, whilst
suffering all the consequences of it, in rising inflation, and rising
interest rates.

In other
words, rising inflation, as global primary product prices, and
consumer goods prices rise, rising rates of interest making the UK's
huge trade deficit ever harder to finance; a collapse in financial
asset and property prices, as rising interest rates reduce their
capitalised values; a falling Pound, intensifying all those factors;
a growing lack of competitiveness, as Britain, outside the EU,
suffers from a lack of economies of scale and from tariff and
non-tariff barriers on its exports.

But, Brexit,
like Trumpism, also represents a resort to protectionism for all of
those inefficient sectors of the economy. It means that the
inefficient home producers will use it to increase their prices. It
is a repetition of what happened in the UK's sclerotic economy of the
mid 1960's and after, that led to nationalistic campaigns to limit
imports such as “I'm Backing Britain”. The Brexiteers are hoping that Trump will ride to their rescue, as they are isolated from the huge EU market, but Trump's protectionist policies, and pursuance of "America First", will have the opposite effect. It will mean a contraction of trade, from which Britain as a relatively small economy will suffer. Outside the bargaining power of the EU, any deals that Trump might do with Britain will reflect the fact that the US is a huge $17 trillion economy, whereas Britain is a tiny $2 trillion economy. Any benefit will go to the US at the UK's expense, as happens with any such deal between parties with vastly unequal bargaining power.

And, of
course, not only are such reactionary campaigns doomed to failure,
but they initially reduce workers' living standards, as they have to
pay these higher prices made possible by the excess liquidity
sloshing about the system. Then, especially where workers are
heavily over-borrowed, they lead to demands for higher wages, which
protected firms then pay, in the belief they can simply recover the
pay rise via yet higher prices.

The
difference today from the 1970's is that the UK is a much less
significant economy, as others, like China, India, Japan, and
elsewhere have developed. Moreover, the amount of liquidity in the
system, and the degree of inflation of asset prices is at historic
and and unprecedentedly high levels; the degree of private household
debt is huge, whilst wages are low and productivity is falling. In
the 1970's, the UK was entering the EEC, with all of the advantages
that provided of a larger market and lower costs that brought with
it, whereas today it is proposing to cut itself off from those
benefits.Back To Part 2

About Me

Left school at 16. Became an ASTMS shop steward at 19, and a lifelong trade union activist. Delegate to North Staffs Trades Council 1974-87. Secretary North Staffs Miners Support Committee 1984-5. President North Staffs Trades Council 1985-6 and 1986-7. Delegate to Staffordshire Association of Trades Councils 1985-7. Delegate West Midlands Regional Council of the TUC 1985-7. Secretary Newcastle UNISON 2000-2.
Member of the International Communist League/Workers Socialist League 1974-87.
Went to University as mature student at age of 24. Obtained Joint Honours Degree in Economics and Politics with Philosophy and Statistics, followed by a Post Graduate Certificate in Education.
Labour Party member since 1974. Stoke City Councillor 1983-4, expelled from Labour group 1983, and resigned from Council in 1984 because of refusing to vote for rent and rate rises, and budget cuts. Staffordshire County Councillor 1997-2005.
Assistant Secretary Stoke District Labour Party 1981, and held pretty much every position from Executive member, to Branch Secretary, and Branch Chair.